What is a non-resident alien?

What is a non-resident alien?

In the United States, a non-resident alien is a person who is neither a US citizen nor a US national and who does not qualify as a tax resident of the United States. This covers anyone who fails the green card test or does not satisfy the Internal Revenue Service's (IRS) substantial presence test .

Typically, non-resident aliens are present in the US on a temporary basis under non-immigrant visas, for example J-1 or F-1 visas. This group includes international students, those participating in academic programmes, and non-resident contractors. They have a particular tax status and, in most cases, do not pay FICA contributions for Medicare and social security.

A non-resident alien may only undertake work in the US once they have been authorised to do so. This authorisation is requested by completing the  I-9 Employee Eligibility Verification form.

Both organisations and individual employers must be clear about the rights, status and tax responsibilities of non-resident aliens to meet US legal requirements. Failure to comply can result in financial penalties, incorrect tax assessments and legal difficulties.

Non-resident alien taxation

Tax matters are often the most misunderstood aspect of non-resident alien status. According to the IRS, non-resident aliens occupy a distinct tax category and are governed by tax rules that differ from those for residents.

In practice, they are taxed on US-sourced income either at resident rates or at flat rates, depending on the nature of their activities. For instance, non-resident independent contractors are typically taxed at a flat rate of 30% on US income. Non-resident aliens often have restricted access to deductions and credits and are barred from claiming certain tax benefits, including the Earned Income Tax Credit (EITC) and the American Opportunity Tax Credit (AOTC).

If a non-resident alien is married to a resident alien, they may elect to file a joint tax return. At the close of the tax year, the resident spouse may opt to treat the non-resident as a resident for tax purposes. Where that election is made, the couple should submit their return on Form 1040 using the Married Filing Jointly status. When departing the United States, they should submit Form 1040-C.

A non-resident alien is required to file a tax return if they conducted a trade or business in the United States during the preceding year, or if they received US income that was not subject to withholding. Those seeking a refund or aiming to claim deductions must likewise file an income tax return.

As noted above, non-resident aliens are generally exempt from social security and Medicare taxes, although they may still owe other federal or state taxes.

Hiring non-resident aliens

To employ a non-resident alien lawfully, a US employer must follow the relevant immigration rules. That means confirming the individual's right to work and observing visa conditions. Employers are also responsible for withholding tax and meeting reporting duties to government authorities. 

The documentation typically required includes:

• Authorization to work in the US via Form I-9
• A Certificate of Naturalization
• An unexpired Temporary Resident Card
• A social security number (SSN)
• A driver’s licence or a state- or federal-issued ID card
• An original birth certificate

Compliance can be complicated, especially when it comes to the tax consequences of engaging non-resident aliens. Employers should take account of any applicable tax treaties. When hiring Remote staff internationally, they should take steps to avoid creating a permanent establishment that would oblige the business to set up an entity overseas. Using employer of record services can help mitigate that risk.

Despite the practical challenges, engaging non-resident aliens can bring clear benefits to employers, such as access to a wider talent pool and a broader range of skills. Offering benefits can also help attract top talent.